Long-Term Investors, Ignore the Noise in Nvidia Stock

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Chipmaker Nvidia (NASDAQ:NVDA) shocked financial markets today when the company sharply cut its fourth-quarter guide amid deteriorating economic conditions. Specifically, Nvidia cut its fourth-quarter revenue guide by nearly 20% from $2.7 billion to $2.2 billion. The company also dropped its gross margin guide by 650 basis points from 62.5% to 56%.

Those aren’t small cuts. Consequently, the reaction in NVDA stock wasn’t small, either. As of this writing, Nvidia stock is down over 15% on the news.

To be sure, this guidance is a sign of the times. The global semiconductor market across every geography and every end market is slowing due to rising macroeconomic uncertainty. So long as this slowdown persists, Nvidia will struggle for gains. It’s that simple.

But, if you zoom out and look at the big picture, the outlook for Nvidia stock becomes much more optimistic. The AI and data-related growth drivers underlying this stock remain robust. They will remain robust over the next several years, too. During that stretch, revenue, margins and profits will grow by leaps and bounds. That huge growth will eventually and inevitably push Nvidia stock back to all time highs.

From this perspective, Nvidia stock is just hitting a road bump right now. This road bump will create near term challenges for the sock. Ultimately, though, it will pass, and NVDA will roar higher.

As such, long term investors would be wise to ignore this near term noise. The best game plan here and now is to develop a solid long term position, add to that position on weakness, and trim into strength.

Near-Term Challenges Are Mounting for NVDA

The story surrounding Nvidia stock has dramatically changed over the past several months.

Three months ago, the Q4 revenue estimate stood at $3.4 billion, and called for roughly 15% year-over-year growth. Inventory issues from a sudden drop-off in cryptocurrency mining demand in Q3 caused management to cut the Q4 revenue number to $2.7 billion. That represented negative 7% year-over-year growth. Those inventory issues coupled with deteriorating macroeconomic conditions in Q4 to create a big supply, falling demand situation. That forced management to again cut the Q4 guide to $2.2 billion, or down around 25% year-over-year.

In other words, three months ago, Nvidia was expected to grow Q4 revenues by 15%. Now, Q4 revenues are expected to drop 25%. Also, gross margins were expected to rise in Q4 three months ago. Now, they are expected to fall by over 600 basis points.

This huge slowdown in Nvidia’s growth trajectory is a sign of the times in the global semiconductor market. Peer Intel (NASDAQ:INTC) similarly warned about slowing global data center growth last week amid increasing macroeconomic uncertainty. Apple (NASDAQ:AAPL) and many of its suppliers have warned that smart device demand in emerging markets is slowing. The Semiconductor Industry Association expects the global semiconductor market to go from 15%-plus growth in 2018, to below 5% growth in 2019.

Broadly speaking, the semiconductor market globally is slowing. It’s slowing in every geography and across every end market.

Against that backdrop, it will be tough for Nvidia stock to rally. The stock still trades at nearly 20X forward earnings estimates that are rapidly falling (90 days ago, the consensus 2020 EPS estimate was near $8; by the end of the week, it could be below $7). Meanwhile, most semiconductor stocks trade around 12 forward earnings, so this stock is relatively overvalued. Granted, Nvidia has far more growth firepower than most other chip stocks. But, in this environment, investors usually take a “sell first, ask questions” later approach to big multiple names.

Thus, so long as the near-term macroeconomic trend remains unfavorable and Nvidia stock remains relatively overvalued, this stock will struggle for gains.

Lots of Firepower for Nvidia Stock in The Long Run

In the big picture, near-term challenges are just noise for Nvidia stock.

In that big picture, Nvidia stock has four big growth drivers: data centers, pro visualization, automation and IoT. The common threads among those four growth drivers are the increasing investment in and deployment of AI technologies, as well as the increasing investment in and utilization of data.

These two trends are the foundation of the future. Within the next decade, AI will become the biggest and most important market in the world, powering a new generation of automation and cloud computing that has applications across all industries. Meanwhile, data is the fuel for AI, so it, too, will become increasingly important and valuable over the next several years.

From this perspective, so long as Nvidia remains on top of the high-end GPU market, Nvidia stock will benefit from huge secular growth drivers over the next several years. Those secular growth drivers will ultimately power robust revenue, margin and profit growth, especially from today’s depressed levels. That robust growth will inevitably drive big gains in NVDA.

From this perspective, all this talk about slowing data center demand, inventory issues and falling prices is just near-term noise that’s a byproduct of macroeconomic uncertainty. Eventually, that uncertainty will clear up, this noise will drown out, and Nvidia will get back to growing at a healthy pace.

Bottom Line

Nvidia stock is supported by a powerful and healthy long-term growth narrative which is going through some growing pains right now. Eventually, these growing pains will pass, and Nvidia stock will bounce back.

As such, the best strategy here is to develop a long term position at depressed prices, add on further weakness, and trim on strength.

As of this writing, Luke Lango was long NVDA, INTC and AAPL. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/long-term-ignore-noise-nvidia-stock-nvda-nimg/.

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